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As of June 19, there were 790 stocks that met two important criteria:
- They yield more than 4%.
- They are owned by the investing gurus, or have a high predictability score (predictability refers to consistent growth of revenue and earnings over the past 10 years).
One of the companies on the list is H&R Block Inc. (HRB, Financial) with a current dividend yield well above the threshold and ownership by seven of the investing legends. However, it fails on the criterion of high predictability, with a rating of just one out of five.
It is the biggest American tax preparation company, operating in the U.S., Canada and Australia, with the bulk of its sales from the U.S.
It has a $3 billion market capitalization. For fiscal 2019, ending on April 30 of that year, it had revenue of $3.05 billion and net income of $445 million, or earnings per share of $2.15. Fiscal 2020 has been disrupted by the Covid-19 crisis and not likely to be typical.
Analysis
We will analyze H&R Block by looking in more detail at each line in its dividend table:
Dividend yield
With a yield of 6.58%, we would normally be suspicious, expecting that something too good to be true is, in fact, not true.
But H&R Block’s dividend went up not because the board of directors has been reckless, but because the price dropped roughly 50% in the past year:
For the past four quarters, the company has paid a dividend of 26 cents for an annual dividend of $1.04. And in its earnings release published June 16, the firm indicated the next dividend will be unchanged:
“The company announced that its Board of Directors has declared a quarterly cash dividend of $0.26 per share, payable on July 1, 2020 to shareholders of record as of June 26, 2020. H&R Block has paid quarterly dividends consecutively since the company went public in 1962. Future actions regarding dividends will be dependent upon the Board's approval following consideration of operating results, market conditions, and capital needs, among other factors.”
H&R Block also reported that on April 30 of this year, it had $2.7 billion in cash, $2 billion of which came from a line of credit. Total revenue for that quarter (February, March and April) were down 14.7%.
Dividend payout ratio
The dividend payout ratio indicates how sustainable the dividend is and, in this case, it appears to be solid.
The ratio, at 34.67, shows that just over a third of the company’s earnings are used to cover the dividend. That’s a conservative figure, giving the company quite a bit of room should the earnings per share fall, as they did in the fourth quarter of fiscal 2020.
While there are no defined boundaries, some consider 35% to 55% a good range for payout, while others think a ratio between 40% and 80% is reasonable. Of course, such boundaries must be tailored to the circumstances of individual stocks. With H&R Block’s ratio lower than both of those, it appears the company is being cautious.
Its ratio is also in line with those of its competitors and peers in the Personal Services industry:
Three-year dividend growth rate
In addition to the amount of the dividend, income investors want to know whether it is growing. And if so, by how much.
While it’s impossible to know in advance, we can gain some insight by looking at the growth rate over the past three years.
For H&R Block, the growth rate averaged 7.7% per year, which is well above the rate of inflation.
GuruFocus adds, “During the past 10 years, the average Dividends Per Share Growth Rate was 5.50% per year.”
Forward dividend yield
The forward dividend yield differs from the conventional yield, as discussed above, because it is based solely on the most recent dividend payment.
Since H&R Block's latest payment, at 26 cents per share, was the same as the four previous payments, the forward dividend yield is the same as the conventional yield. Had the most recent payment been less or more than 26 cents, then the forward yield would be lower or higher than the regular yield.
Five-year yield on cost
Assuming the company continues to raise dividend rates at the same rate as it did over the past five years, then an investor can expect gains to average 8.55% per year.
This metric provides a base for estimating future total returns. Add the value of potential stock buybacks and capital gains, and it could be cautiously assumed that the investment will generate double-digit increases every year for the next five years.
Three-year average buyback ratio
A buyback is similar to a dividend because it is a form of transfer to shareholders—when the process goes well. Investors should be concerned when management buys back stock for prices greater than the market prices.
With a buyback ratio of 2.9, we know the company has bought back shares (if the number is negative, the company has been issuing new shares, or issuing more new shares than it is buying back).
In the earnings report for fiscal 2020 (ending April 30), H&R Block reported it had repurchased 10.1 million shares at an average price of $24.36 in the first three quarters. No shares were purchased in the fourth quarter because of uncertainty over the effects of Covid-19.
It spent $247 million on those 10.1 million shares and is authorized to buy up to $750 million more before June 2022.
How does that average buyback price compare with the market price of shares in that period? This chart shows market prices for the period May 1, 2019 to Jan. 31, 2020:
At a glance, it appears the buyback price was below the market price in the first part of the period, and roughly at par in the second part. We’ll have to wait for the next annual report for details.
Guru ownership
As noted, seven of the investing gurus have positions in H&R Block. The largest holding is that of First Eagle Investment (Trades, Portfolio), which had nearly 5.5 million shares at the end of the first quarter. Mario Gabelli (Trades, Portfolio) of GAMCO Investors had 827,425 shares and Pioneer Investments (Trades, Portfolio) had 447,499 shares.
In his second-quarter 2019 letter to shareholders, Gabelli observed that the company had begun offering its own “do-it-yourself” software to go along with its in-office services. That followed its acquisition of Wave Financial, a cloud-based booking service for small businesses, earlier in 2019. He concluded, “The company should be able to improve tax prep market share and margins while continuing to generate significant cash flow for shareholders.”
Conclusion
H&R Block is a mature company that is well positioned for future growth and offering an attractive dividend yield of 6.58%.
The five-year yield on cost of 8.55% provides a base on which investors could look for total returns in the double digits over those five years.
For income investors, this could justifiably be a shortlist stock.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
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